The Nifty Financial Services Index accounts for roughly a third of the Nifty 500’s weighting. With the next largest components Consumer Goods (13.40%), Energy (12%), and IT (10.90%) ripping to the upside, we know that they’ll eventually need to rest, which is why the Nifty Financial Services Index is by far and away the most important chart in India right now.
As I stated above, the Nifty Financial Services Index accounts for roughly a third of the Nifty 500’s weighting. This means that they tend to trade together and that any divergence between them is resolved one way or another. Financials made new highs in July, with the Nifty 500 now making its own highs 6 weeks later.
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I know this is “Chart of The Week”, but there are three other charts that I think we need to look at for proper perspective on Financials.
The first is HDFC Bank, which is the largest component of the Index at 27%. Although it made new highs well before the Financial Services Index, it is now beginning to pull back which presents a headwind for the sector.
Leaders taking a rest is a healthy development, but only if there are others in the Index to pick up the slack. With that in mind, a failed breakout and bearish momentum divergence in the equally-weighted version of the index will be confirmed if prices close below 1,395. This suggests the broad-based participation we’ve seen is diminishing slightly and that some further consolidation through time or price is necessary before continuing higher.
Last is the Cap-Weighted Nifty Financial Services Index which has stagnated above the January highs as momentum diverges negatively. While not inherently bearish, we want to see this resolve to the upside, as a downside resolution would confirm a failed breakout and the bearish momentum divergence. This would be a negative for the sector itself, as well as the broader market.
The Bottom Line: The Nifty Financial Services Index has been a driving force behind the rally in the broader-market, but there are signs that this sector may be cooling off. While we’ve not seen it yet, a confirmation of the failed breakout and bearish divergence in the equally-weighted and cap-weighted versions of this index would suggest a pause in the sector’s long-term uptrend (through a price or time correction) is likely.
We’ll continue to monitor this sector and the weight of the evidence to see if our bullish stance toward Indian equities needs to be adjusted, but for now there continues to be more bullish data points than bearish ones.
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